Summary:

  • Another great month in the stock market, and I’m becoming more and more cautious for every market uptick
  • The refined strategy; «Nordic Compounders» is on track and operational
  • Portfolio is outperforming every benchmark, even with a large cash position, and close to a new all time high
  • Cash position of 25.6%
  • Current portfolio is comprised of 17 companies, which is down from 19 companies in end April
  • Sold Securitas, Boule Diagnostics and switched Castellum with Sagax. Added more in Tomra Systems.
Portfolio as per 29 May 2020

The portfolio return for May ended at 6.5%, and is close to a new ATH! This is achieved even with a large portion in cash, which means the remaining stocks are performing great. The reason why I’m holding such a large cash position is because the I cannot understand the recent market recovery. Record-high unemployment, increasing US – China conflict and an ongoing pandemic is not, in my opinion, a reason for new all time highs. I’ll therefore play it more on the safe side going forward.

Performance YTD

Nordic Compounders

I want a portfolio with high quality Nordic compounders. To be of interest a company has to have a solid balance sheet, high return on capital, high historic growth, stabile margins and a long term megatrend in the back. By constantly focusing on quality compounders over the long run the outperformance against benchmarks will be great.

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with a fine result

Charlie Munger

Investment Journal:

As mentioned in the report for April I did not expect an active month in May. Most of the «clean up» was done in April and just a few transactions was made this month. Going forward I don’t expect to be very active in purchasing additional companies, but I might add to existing positions or become more aggressive if the right opportunity presents itself.

Securitas was sold due to poor performance and because my investment thesis proved wrong. Link to write-up: «Securitas – buy, sell or hold?»

Boule Diagnostics was also offloaded this month as my investment thesis has played out and because the company does not meet the standards I set for my companies, i.e. the quality of the company is not high enough and they have not a good enough historically track record. Link to write-up: «No longer bull on Boule Diagnostics»

A switch in my exposure to real estate was also made. Castellum was sold and Sagax was added Castellum may be a safer real estate play, but Sagax has far superior returns on equity, higher yield spread and a tilt towards warehouses which I find more interesting going forward with increasing E-commerce and possible less demand for office rental. Link to write-up: ««Switched Castellum with Sagax»

Finally I bought more shares in Tomra Systems at 330 NOK per share following the selldown by Latour AB (majority shareholder). The share price declined ~ 15% in two days and the short term Risk/Reward was OK. Valuation still stretched, but the company is a real compounder!

Dividends received

Received redemption shares in NetEnt AB

Latest posts:

Summary:

  • Corona-virus was still the most debatted topic this month, but the stock market stabilized and much of the downturn evaporated
  • Many good buy opportunities are now gone
  • Cash position at 24 %
  • Current portfolio is comprised of 19 companies, which is down from 29 companies
  • I’m still working on the “Edd Invest 2.0”-investment strategy
  • Current watchlist is now comprised of 51 companies
Current portfolio

The portfolio return for April ended at 9.43 % and turned green YTD after the turmoil in March.

Performance as per 30 April 2020

So, even though the portfolio has outperformed the benchmark and is positive for the year I’m amending my investment strategy.

Why? I don’t believe the current turmoil is over and I expect a second downturn in the market. The decline we experienced in March and partly in April gave great insight into how the indiviual holdings performed during a downturn, shortfalls in my current strategy and a hope for a even more robust portfolio of quality companies going forward.

On the basis of the Covid market drop I have come to realise that I was not ready for such a sharp decline over a short time period and made some transactions, in hindsight, that was based on irrational behaviour. I want to reduce subjectivity as much as possible and be even more in control of what I own and why I own it. Not an entirely new strategy, but redefining it a bit.

Investment Journal:

Many transactions took place in April as well, but I don’t expect to be as active in May. There are several reasons for this. In April I tossed out all non-Nordic holdings (Transalta Renewables, Abbvie, Brookfield Renewable Partners and Visa) as well as Equinor and Cloetta. Even though I would rate the companies sold as high-quality companies I chose to divest non-Nordic holdings since I want to have greater control of the companies in my portfolio, and because I want a greater portfolio concentration.

Cloetta AB was sold due to their poor relative performance in a weak market (Consumer Defensive), profit warning and dividend cut. Equinor was sold due to the weak oil market outlook for months to come. The proceeds from my sales means I’m now holding a cash position of 24 %.

I increased my stakes in Bakkafrost, UPM-Kymmene and Beijer Ref, and reduced my position in Tomra by 1/5.

Short write-ups for Bakkafrost and Beijer Ref can be found here:

Bakkafrost ASA – The cost leader in salmon farming

Beijer Ref AB – global refrigeration wholesaler

Tomra – downsizing position

Dividends in April:

Dividends received this month was down from last year due to a lot of dividend cuts, witheld dividend tax was received in April 2019, and because I’ve sold Sparebanken Midt-Norge, Sparebanken Nord-Norge and Nordea since last year.

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The impact of Covid-19 on the market began in February and continued with full force in March. Year to date the portfolio is down 8.9% and 5% in March. The lessons I’ve learned and the experience gained this past month is far more valuable in the long run than the value my portfolio has been reduced by in the past month. This monthly report will be less detailed, since there are some ongoing changes in my investment strategy, which I will explain in detail in another post.

Last month I wrote that the market decline should act as a reminder that there is risk involved when investing in the stock market and an opportunity to learn more about yourself as an investor. This month the first lesson is that market timing is extremely difficult, e.g. US stock indices up 20% in three trading days and theoretically the bear market ended, and a bull market began. The second lesson is that the Norwegian Krone is a shit currency in turbulent times which is a plus for Norwegian based investors, but also a minus since the additional purchases becomes less attractive due to the weaker Krone. The third lesson is to not jump on the buy wagon too soon and instead hold on to the cash. The final lesson is dividends are not as safe as they appear to be!

In March I added to my positions in high quality companies, sold weaker ones and made a switch between Wartsila (out) and NetEnt (in).

The investment thesis in Wartsila Corp did not play out, hence I sold the company with a loss and moved on to the next one: NetEnt AB.

NetEnt is an exciting new addition to my portfolio and checks almost all of the boxes in my investment checklist. The only drawback is the debt which the company added after they acquired Red Tiger, but I believe the company will continue to reduce the debt load.

Short about the company: the company operates in the gaming sector by development of gaming and system solutions for casino operators. Today, development is driven through the company’s technical platform and the games come in varying forms, from classic casino games to entertainment games. In addition, additional services are offered in the form of marketing, training and technical support.

I made a total of 13 purchases in March and 4 sells. Sysco Corp was added on 18 March and sold four days later with a 35 % gain due to a weaker Norwegian Krone and a revaluation of the stock. The great return in a short period of time was too tempting to ignore.

Going into April I have a 5 % cash position due to offloading Aker and AkerBP, and going forward I will keep adding to my positions, improve my investment processes and keep reading annual reports.

Investment Journal:

Dividends in March:

Last month I reported the organic dividend growth, but the market turmoil in March gave me a valuable lesson: Dividend safety. Many of my companies postponed or cancelled their dividend due to the increased uncertainty. There is no value today to keep tabs on the organic growth number!

The dividends in March was paid out by Transalta Renewables, Castellum, Mowi and Visa. Total dividends received was NOK 1.197, up from NOK 1.172 last year, but this is non-comparable since last year also included return of withheld tax on dividends of NOK 358. The actual increase is therefore approximately 32%.

Dividend overview

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The focus in February was on the quarterly reports for my remaining holdings which did not report in January. I love this time of the year as most dividend hikes and payments are announced in this period. But there was something else that made the headlines this month; COVID-19 (or the Corona-virus). February started out great, but when the longer-term effects on the economy became clearer the stock market was suddenly reminded that there is risk involved when investing in stocks. My portfolio took a hit during the “Corona-week” and lost over 100.000 NOK in value and is now down 3.2% year to date.

I’ll not dwell much more about this topic in this report, since it is well covered elsewhere, but I believe that the decline in the stock market last week should act as a reminder and a chance to learn more about yourself as an investor.

Are we heading into a storm?

If an investor is starting to panic when the market declines a little over 10% the investor’s risk tolerance is not in line with investing in the stock market, the portfolio is to heavily leveraged or the amount of experience does not match the holdings in your portfolio. Harsh words, but the reality is that most investors is not suited for investing in individual stocks and are better of purchasing index funds. For an investor the most important organ is not the brain, but the stomach!

Inexperience will cause you to doubt yourself and your decisions, and that is why I strongly recommend that you stick to your investment strategy instead of follow the headlines in the financial press! If you do not have a defined investment strategy you have to do your homework and start defining who you are in the stock market.

Here you can find more information about my strategy: Part 1 – The Investment Strategy

I do not focus so much on the panic in the media, but I try to exploit the increased uncertainty by increasing my positions in companies on my watchlist and adding to my holdings. Will the stock market continue to decline? I don’t know and anyone that claims they know should be disregarded as false prophets. What I do know is that I will keep purchasing high-quality companies with increasing earnings, profitability and dividends. In the long run I believe that the stock market is the best vehicle for highest value creation over time.

See comments at the end for transactions made in February.

Dividends in February:

Since all my holdings has reported at the end of February I can now review my organic dividend growth for the year. Organic dividend growth for the portfolio is the sum of changes in announced dividends multiplied with the holding’s share in the portfolio. Five companies did not announce a dividend increase, where of three was unexpected (UPM-Kymmene, Mowi and Cloetta), while Wartsila and Transalta did not change as expected. Currently the organic dividend growth is 8.7 %.

The dividends in February was paid out by Transalta Renewables, AbbVie, Aker BP and Equinor. Total dividends received was NOK 1.628, up from NOK 911 last year (increase of 79%). This is partly due to increases in company dividends, but the largest effect is due to higher yielding stocks paying out dividends in February compared to last year and a favourable USD / NOK. Currently I’m on track to receive NOK 31.000 in dividends this year, but as I keep adding cash into my portfolio and buying more assets this amount will increase.

Dividends per month increases year over year

Investment Journal:

Transactions in 2020

I sold Elkem ASA at an average price of NOK 23 per share since I wanted to reduce my exposure to cyclical businesses with a high exposure to China. They also announced a dividend cut of 76% and my patience with the company had worn out.

Lerøy Seafood was sold at NOK 62 following a good report, but the company has the highest costs per produced kilo in the industry and I already own Bakkafrost and Mowi, which in my opinion is of a higher quality than Lerøy.

Slide from Pareto Equity Research

Purchases:

Two companies within the MedTech-sector was included this month. I also bought more in eight companies already in my portfolio during the “Corona-week”.

Vitrolife:

The company reported a solid Q4, but their guidance for 2020 was weak (i.e. Corona) and there was a lot of insider selling this month. I therefore initiated a position in the company.

Read my short write-up here: Vitrolife – profitable growth, but skyhigh valuation

Medistim:

Bilderesultat for medistim

About the company:  The company develops, produces, services, leases, and distributes medical devices for cardio-vascular surgery in the United States, Europe, Asia, and internationally. It operates through three segments: Lease of Equipment, Capital and Consumable Sales, and Distribution and Sales of Third Party Products.

The company will benefit from an ageing population, since most cardiac surgeries are performed on the elderly population, but they will also benefit from lifestyle changes that translate into higher rates of the conditions of overweight and obesity.

Bilderesultat for medistim

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It goes without saying that the world tomorrow will not be the same as the world yesterday. Changes happen constantly, and the changes may be of a temporary character, but others are so powerful that they will result in changes for the society on a fundamental level.

I have written a short article describing 7 Megatrends and presents 20 Nordic companies which will benefit from these seven megatrends.

Enter your email on my subscription list and receive a free copy of the PDF (link enclosed in welcome message). I will not bombard you with emails but send you regular updates once a month with past write-ups, dividend income updates and other articles on my blog.

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This company is not what you would expect to find in my portfolio, nevertheless I bought a small holding in the company following a write-up by Focused Compunding and Vetle Forsland. I bought into the company at 3.05 NOK per share, subsequent to the company distributing a dividend of 4 NOK per share.

A little summary of what has happened in Nekkar (formerly know as TTS Group) in the past months. Currently the company is undergoing a major transformation as they have sold the majority of their former business to Cargotech, returned 4 NOK per share to equity holders (~55% of enterprise value), acquired Intellilift, changed name from TTS Group to Nekkar, and are now building a more diversified company from the ground.

The company is a micro cap with a total capitalisation of approximately 300 million NOK (~ 30 MUSD) and there is, in my opinion, a lot of uncertainty in their future business areas. Usually I buy solid companies with increasing dividends and a strong track-record, but this company does not tick the boxes in my dividend growth investment strategy. So, why did I buy into this company? In short, the company holds ~3 NOK per share in cash and the stock trades at 3 NOK. Basically, you get Syncrolift for free and access to their other business areas, even though I would argue that only focusing on the highly profitable company, Syncrolift, would be the best way going forward.

I’ll shortly go through the company’s business areas before looking at the financials.

Three business areas

Syncrolift – supplier of ship-handling solutions for shipyards. This is the gem in their portfolio, with stabile margins, 75% market share worldwide, upfront payments by customers totalling 2NOK per share and a all time high order backlog. The company operates in a highly cyclical industry, but the order backlog will ensure that the company is operational and recording revenues until end of 2022.

New Business Areas:

The new business areas will probably be given the most attention from the management in the upcoming years. Some segments will be financed by the profit and float from Syncrolift, but if Nekkar decides to aggressively pursue opportunities in these segments I do believe that the company will have to raise capital, and then most probable through the equity markets.

Aquaculture – this segment may be a drain on the company’s cash flow going forward, since they will be developing solutions for closed cage salmon farming. Their concept is developed in close cooperation with one of the industry’s largest, most successful and reputable companies but they have not yet disclosed the name of their partner.

Currently, this segment does not have any earnings to report and the info on their site is full of popular buzzwords such as “sustainable solutions”, “circular economy” and “digitalization”.

Digital: Intellilift – a 51% share was acquired in Q2 2019. Intellilift is a software company which develops control systems, data software and visualization tools for remote operations in the offshore energy business. The company is cash break-even on a running basis, but it is not showing positive earnings. Examples of present customers are top-tier end customers like AkerBP (drilling operations) and Ørsted (offshore wind).

Offshore Energy & Renewables – from their company presentation at the Pareto Conference on they have listed this as a new business area. Due to the net cash position, I believe the next acquisition by Nekkar will be in this segment. 100 million NOK is at the parent company level, which doesn’t present a opportunity to make a major purchase.

Financials:

I will only focus on the continued business, as the discontinued business is no longer relevant for the company. To review the Q2 – report there will be a lot of factors that disturbs the comparisons with previous periods (changes to IFRS 15 / 16, acquisitions and discontinued business). To explain all changes would be very messy, hence only focusing on status quo and Nekkar going forward will give you enough information to make an investment decision.

The profitable part of Nekkar has a solid platform with good margins and the possibility to grow in the aftersales market (services and upgrades). We see that the other segments does not contribute to an increasing EPS for the company at the moment and I’m hoping that the company will limit its acquisitions going forward, focus on Syncrolift and distribute remaining cash to shareholders. Though, I do not expect this to happen – especially not in the short run.

Source: Interim report Q2 – Nekkar ASA
Source: Interim report Q2 – Nekkar ASA

I finish this write-up with an exctract from the write-up by Focused Compounding “The company (Syncrolift) has a backlog that should keep them busy for the next 3-4 years. Some of that backlog is paid for in cash up front. So, here we had a company trading for less than net cash (though some of the cash was unearned revenue – also known as “float” – provided by customers) with no further needs for capital. Since Syncrolift is paid partially up front and has very little need for PP&E and things like that it would normally have negative invested capital in the business. This means that if Syncrolift were to grow revenue, earnings, free cash flow, etc. by about 6% a year – which is about what it probably has done over the last 25 years – it would be able to pay shareholders a dividend of literally everything it reported in earnings and that dividend would also increase at 6% a year. That’s the beauty of a business with no need for additional capital as it grows. As a shareholder, you get to have your cake and eat it too. Cake here being “free cash flow”

Transaction costs are a frequent discussion point among retail investors and I will in this post explain some of the hidden transactions costs that most retail investors forget and why, as a dividend investor, it is important to keep costs at a minimum.

The ordinary brokerage fee is easy to calculate and is often a minimum fee or a percentage of the transaction.

Do you have an overview of the price of the products in your shopping cart?

One of the costs that are easy to forget is the cost arising from the “Bid/Ask – spread”. For the most liquid stocks, the bid/ask-spread can be extremely small, but for the more illiquid stocks the cost will have a greater impact on your return. Let’s say you consider purchasing Equinor ASA, which is a quite liquid stock. The shares last recorded price is NOK 150. The current ASK-price in the market is NOK 151, while the current BID-price is NOK 149. To purchase the stock you have to pay NOK 151 and you will incur a transaction cost immediately of NOK 1, or ~0.6 %. If you decide to sell your shares in the future you’ll once more pay this bid/ask-cost. The power of dividend investing stems from reinvesting your dividends. The effect of interest compounding goes down due to this liquidity cost and is also one of the cons of dividend investing.

Have you ever made an currency exchange at an airport? If you have, you know the bank screws you over big time. Brokers also knows how to milk their customers when it comes to currency exchanges. When purchasing stocks in foreign currencies they charge you a currency mark-up. This foreign exchange transaction cost will often be as large or larger than the ordinary brokerage fee! For stocks that doesn’t distribute dividends to their shareholders this will mostly be a one-time transaction fee, but for dividend investors this fee will be “charged” every time you receive a dividend. The mark-up ranges from 0.075% to 0.25% per transaction. Every time you receive a dividend, your broker can record an income in their books.

So, even though the most quoted transaction costs is the ordinary brokerage fee, this is not the cost that you should pay to much attention to. It is the liquidity cost (bid/ask spread) and the currency mark-up by your broker that robs you in the long run!

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An introduction to my investment journal has now been uploaded. Here you can track all my investment decisions!

If you want to be updated on a periodic basis, feel free to submit your email below:

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If you do not have an exit plan for your investments, you are not alone. Setting some guidelines and improving your selling decisions will increase your returns and reduce the risk in your portfolio. In part 1 I explained my investment strategy and in part 2 I elaborated on some of the errors most investors do after they have purchased a stock. In this part I will give you some of the rational reasons for when to sell a stock.

You purchase a stock and are happy about the company and its prospects, but suddenly the stock doesn’t act according to your plans. The share price rises quickly and beyond the levels you even thought possible in the short-term or the price plummets and you are in the red even before you are able to check whether the shares are recorded in your portfolio. A recent study may have found the reason why active portfolio management underperforms the general market and why most investors are better off investing in index funds. In some cases, the investors are better off by selling their holdings completely at random even if they are the best stock picker out there.

To be honest, I have made some mistakes over the years when I have decided to sell a stock, but I have also avoided some even bigger mistakes. I have missed out on great profits when I have tried to scalp or day trade a stock, only to see the share price keep on going upwards (remember part 2 and the part about anchoring?). On the other hand, I’m not afraid to realise a loss, which have saved me several times.

What I have learned is that in the cases where I sold a stock (only to see the share price increase subsequently) I had an unrealised profit; the company showed no sign that they had lost their competitive advantage and I felt greedy!

In the cases where I ended up realising a loss, I did not do my initial homework, the company had a high dividend yield (which was not sustainable in the long run) and the company sliced its dividend.

Keeping in mind the research article earlier it is important to have some rules for when to sell a company. Even though you follow a buy-and-hold strategy you must maintain your portfolio and keep the weeds out.

Introducing “The Sell Checklist”

First off, the number one rule for a dividend investor is to sell a stock that reduces its dividend.

The Sell Checklist

If a stock you own reduces its dividend, it is paying you less over time instead of more. This is the opposite of what should happen. You must admit that the business has lost its competitive advantage and reinvest the proceeds of the sale into a more stable business. For a dividend growth investor, one should also consider getting rid of stocks that are not increasing its dividends since this may be a signal from the company that their business has stagnated, the competition has increased or that their dividend level is not sustainable in the long run.

Another reason to sell is when buying the stock was a mistake in the first place or there are alternative investment opportunities with better prospects than your worst performing stock. You must trim the dead weight in your portfolio because it will drag the performance of your overall portfolio down.

Diversification and position sizes

In my portfolio a company cannot constitute more than 10 % of total holdings. The reason for this is because 90% of the benefits of diversification come from owning just 12 to 18 stocks. For a dividend investor one should also take into consideration how exposed your total portfolio is to a dividend cut or dividend reduction by a company. If a large share of your total dividend income is paid out by one company, you become highly dependent on that the company doesn’t slice its dividend. Another positive side effect of setting targets for how much a company can weigh in your portfolio is the positive effects that comes from rebalancing (remember the study mentioned earlier?). Negative effects of incorrect position sizes are that you increase personal errors, violate your own rules and make quick and irrational decisions due to the strong influence (bias) you have from the size of the position.

Volatility

Increased volatility is a signal that the company is not as stable as previously and might be an early sign that the future earnings and dividends are not as safe as it used to be.  

Overpriced

Once again, investors are greedy, and they overreact to good news. If a stock has reached a silly and unsustainable price it may be a rational decision to reduce your position size or sell completely.

Investment journal: If you in retrospect are unable to tell what went wrong, you will most probably not make a profit in the long term. After some time, you will most likely have forgotten why you decided to part with a stock and the reasoning behind your choice. Therefore, in my opinion, it is important to keep an investment journal where you enter your initial purchase decision, cost price, dates and your sell decision. Hopefully you will not make the same mistake again…  

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